"Food intelligence" could cut price swings

Accurate and timely information on the food stocks held by major grain exporters and importers, or "food intelligence", could help prevent sudden and abnormal price hikes that threaten food security.

This was one of the proposals put forward at a day-long meeting of the Inter-Governmental Groups (IGGs) on Grains and on Rice at the UN Food and Agriculture Organization (FAO), held in Rome on 24 September.

Maximo Torero, head of the Markets, Trade and Institutions Division at the International Food Policy Research Institute (IFPRI), a US-based policy think-tank, said similar measures were suggested after the 2007/08 food price crisis had led to price volatility, but not much had been done.

Since July 2010, droughts and fires in Russia, a major wheat producer, have caused global prices to soar by between 60 and 80 percent, while maize has spiked by about 40 percent. The IGGs meeting dealt with these "unexpected" price hikes at length and pronounced that they were "a major threat to food security".

The meeting blamed "national policy responses and speculative behaviour", rather than "global market fundamentals" (global demand and supply of grains), as the major causes of the price hikes.

Basic commodities like grains, sugar and oil experienced boom-times between 2002 and 2008, attracting growing numbers of financial investors to the commodities futures exchange, a move dubbed the "financialization of commodity markets" by the UN Conference on Trade and Development (UNCTAD), an intergovernmental body dealing with trade, investment and development issues.

The IGGs list the impact of financialization of the futures markets - along with poor market transparency, insufficient information about investors, unexpected changes triggered by national food security situations, panic buying and hoarding - among the root causes of harmful, rapid food price hikes. Russia recently announced a ban on exports, which also helped push up prices, economists said.

Gathering food intelligence

"We need better information on the food stocks, especially from the CIS countries [Commonwealth of Independent States - a regional organization comprising the Russian Federation and other members of the former Soviet Union] and many other major exporters, such as China and India, and importers of grains," said Abdolreza Abbassian, an economist who is also secretary of the IGG on Grains.

If FAO could develop credible, timely reports on global storage volumes - at least commercially and publicly held - that would help more than ... earlier production reports

"The big drive of commodity price volatility, and of price spikes, is storage volumes, on which we have terribly unreliable and incomplete statistics," said food security expert Chris Barrett.

"If FAO could develop credible, timely reports on global storage volumes - at least commercially and publicly held - that would help more than ... earlier production reports," he commented. FAO produces reports on crop estimates every two months.

"It's probably too much to ask for reasonable estimates of residential consumer holdings, which can cumulatively have significant effects on the market, as may well have been part of the story in ... 2008," said Barrett, who teaches applied economics at Cornell University in the US.

Abbassian suggested that FAO report every month on the area planted in major grain producing and importing countries, rather than every two months; Torero said an independent "strong, research-based 'intelligence unit' was needed to provide information on stocks around the world".

In the absence of accurate planting data from many countries, FAO and the US Department of Agriculture rely on satellite imagery to produce crop estimates.

"But you cannot really tell [from a satellite image] whether it is maize or wheat; besides, you need information on other food crops, such as cassava and potato, to build a comprehensive food security scenario," said Abbassian.

"We need to look at innovative solutions and new technologies, such as the use of cellphones; farmers could use cellphones to let a central authority know how much they had planted, or simply whether the expected harvest was 'good' or 'bad'".

Tackling national policy

After the 2007/08 food price crisis, countries at the 2009 World Summit on Food Security agreed "to refrain from taking measures that are inconsistent" with World Trade Organisation (WTO) rules, which do not allow countries to interfere with exports and imports in such a way as to disrupt trade. However, WTO rules do not apply when countries can show they are resorting to temporary bans to protect their food supply.

Many countries use this "loophole", and economists believe it played a role in escalating food prices in 2008. Barrett said the WTO could, "In principle, have an effect if an agreement could be reached to limit export bans of the sort that have contributed significantly to price volatility in the past two-plus years," by creating uncertain purchasing conditions for major importers.

The WTO's dispute resolution mechanism provided "a credible mechanism for enforcing agreements, and such restraints could help improve global food market functioning by preventing major political disruptions of markets, especially ones that commonly compound disruptions caused by nature," Barrett commented.

Reining in the futures market

UNCTAD pointed out that in the absence of accurate reliable public information on food stocks, traders formulated price expectations on the basis of partial and uncertain data, which "may lead them to focus on a small number of available signals, with the attendant risk of herding and copying the behaviour of others".

These signals could be provided by unscrupulous commodities speculators, who were often substantial investors and sometimes manipulated markets by sending signals that would work to their advantage. "This makes it difficult for other traders to judge whether market prices are changing because of the position changes of the ... traders, or as a response to new information about market fundamentals."

Torero called for measures to rein in such traders and urged countries to regulate their commodities futures markets. Among possible solutions could be measures to impose limits on the amount invested in these markets.

The US has already put forward plans to curb speculation, while France has sent proposals to the European Union to tighten existing regulation of the commodities market, Torero noted. Countries with other large commodities exchanges, such as China, India, Japan and South Africa, should begin to explore such options.

Wessel Lemmer, an economist at Grain SA, a national farmers association in South Africa, agreed that there was a need to curb speculation. "The hike in grain prices has not affected local prices yet, but it would be good for our export prices, as South Africa has surplus of maize at the moment."

In the long term greater investment in agriculture was needed, Torero said, and reiterated the IFPRI proposal that regional reserves of staple grains be established.

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